Six Compliance Topics from Lenders about TRID

Over time TRID has settled in to a routine set of policies and procedures. Even so, some questions persist, and we are in a good position to know about these topics because we get inquiries from our many clients. Because of our clients’ inquiries, we are able often to know what regulatory compliance issues are most important in the loan origination and servicing processes. Our experts respond case-by-case, but the overall research is shared, as needed, with our clientele. Our collection of research is huge and we offer our knowledge, experience, and expertise to our clients in order to ensure that they receive the very best guidance – a commitment that Lenders Compliance Group is recognized for keeping!

In this outline, we provide six topics that have been raised several times over the last few years.

1. The Basics: Loans Subject to 12 CFR 1026.19(e) and (f)

The TRID rule consolidates four previous disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms:

-a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and

-a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

The new disclosures apply to most closed-end consumer credit transactions secured by real property.

Credit extended to certain trusts for tax or estate planning purposes is not exempt from the TILA-RESPA rule.

However, some specific categories of loans are excluded from the rule. Specifically, the rule does not apply to home equity lines of credit (HELOCs), reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land).

You may not use the new disclosures on applications received before August 1, 2015, and you may not use them after August 1, 2015, on loans listed above that are exempt. Therefore, you cannot use them on reverse mortgages or on loans for mobile homes not attached to real property.

You must use existing forms and follow the rules in 12 CFR 1026.18.

2. Timing for Delivery of the Loan Estimate

Generally, the creditor is responsible for ensuring that it delivers or places in the mail the Loan Estimate form no later than the third business day after receiving the consumer’s application and seven business days before the consummation of the loan.

If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf. [12 CFR 1026.19(e)(1)(ii)]

If the broker provides the Loan Estimate, it satisfies your obligation; however, you are still responsible for any errors or defects, and so third-party provider management is crucial.

Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

TEAM TRID™ - Compliance Solution

Announcement by Jonathan Foxx
President & Managing Director

Lenders Compliance Group is the nationwide mortgage risk management firm. Today we announced TEAM TRID™, the hands-on compliance solution to implementing TILA-RESPA Disclosure Integration. LCG has put their own team together, consisting of subject matter experts in all relevant areas of regulatory compliance, the purpose of which is to ensure that the TILA-RESPA Integration Disclosure (TRID) requirements are implemented for their clients and financial services institutions with a need for compliance support. The compliance effective date for TRID is August 1, 2015.

My concern for several months now has been the misinformation, opinions, pontifications, webinars, seminars, assumptions, admonitions, speculations, disinformation, inaccuracies, exhortations, hedged answers, proclamations, tenuous training, costly forums and other pay-to-play venues, that have been heartily stalking mortgage lenders and originators.

Some purveyors of information are charging as much as $6000 just for TRID manuals, not counting the expensive training fees and hourly hand-holding fees! In my view, people need reasonably priced, expert support at this time, not yet another guide for the perplexed, costly training modules, and stop watch, hourly counseling charges.

The compliance solution offered by LCG is a hands-on approach, offered on a flat fee basis. By retaining Team TRID™, mortgage lenders, mortgage brokers, and settlement agents, will receive the tools needed to implement TRID.

According to the Team TRID™ methodology, clients will receive:

• Webinar and Overview: Four Step Method - Planning Steps 
• Webinar and Overview: Loan Estimate  
• Webinar and Overview: Closing Disclosure  
• Published & Advance Copy White Papers 
• Implementation Checklists for: 
• Mortgage Lenders
• Mortgage Brokers
• Settlement Agents 
• Virtual Round Tables 
• Consultations on TRID implementation 
• Access to Subject Matter Experts

The difference between us and the cottage industry of information pundits is that we provide an actual team of hands-on experts to work with a client, and we do not charge for forms, checklists, and procedures guidance. We move at the client’s pace. There is no hourly fee!

TRID is certainly a once-in-a-generation change to residential mortgage loan disclosure - it deserves a personal task force devoted assist in its implementation, with careful planning and cost-effective, reliable compliance support.

Click to learn more about Team TRID™.

RESPA/TILA Integration - Part I: Overview and Loan Estimate (Includes Loan Estimate Table)

RESPA/TILA Integration – Part I: Overview and Loan Estimate

   Jonathan Foxx [*]

 WHITE PAPER

This first of a four-part series will introduce the RESPA/TILA Integration and treat the numerous features of the Loan Estimate. In the second part of the series, I will detail the features of the Closing Disclosure. The third part will be a detailed analysis of the Loan Estimate. The fourth part will provide an in depth scrutiny of the Closing Disclosure.

Accompanying this article is a Loan Estimate Table that may be used for certain itemized categories and action requirements. The table outlines the types of areas of interest in many of the routine requirements of the Loan Estimate process. In reviewing the table, notice how many of these categories in some respects reflect the pre-August 2015 disclosure process. Rather than a before-and-after, comparative analysis, the Loan Estimate Table provides the requirements of the post-August 2015 Rule itself.

Two Download Locations

 White Paper and Loan Estimate Table. (One Download, Two Documents.)

White Paper and Loan Estimate Table. (Two Downloads, Two Documents.)

In the other articles of this four-part series, I will provide charts, tables, form specimens, and annotations for applicable categories and action requirements relating to the RESPA-TILA Integration. The full series, and accompanying charts, tables, and form specimens, will also appear in National Mortgage Professional Magazine, commencing October 2014. 

Discussion

Let’s admit at the outset that having to explain to loan applicants the fees and boxes and pages of the Good Faith Estimate (GFE) is not for the faint of heart. The Truth in Lending Disclosure (TIL) remains a conundrum without peer: difficult to explain to a consumer in just a few words; inscrutable even to loan officers; and, blisteringly enigmatic often even to lenders. Both disclosures are somewhat archaic, examples of good intentions gone to the shadowy realm of Unintended Consequences.

Notwithstanding the foregoing debacle, there is the infamous HUD-1 Settlement Statement (HUD-1), infamous for its myriad codes, infamous for codes that should correlate or sometimes seem not to correlate to the GFE itself, infamous for mapping challenges to the loan origination system, and infamous for irksome consternation about where, what, and how to show certain fees!

A consumer’s distrust of the lender seems to increase with the duration of the explanation provided by the mortgage loan originator. If it takes more than a sentence or two to explain a disclosure’s contents, many consumers are already hesitating, wondering if there’s something they’re not being told! So, is there a way to provide a new kind of consumer disclosure that replaces the overly-encrusted, superannuated, periodically reconditioned, creaky, decades’ old twosome and settlement documents that have dominated the origination of residential mortgage loans for an entire generation of mortgage loan originators?

Into this maelstrom of implacable confusion steps the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The debate as to whether we need to replace the GFE, TIL, and settlement disclosures, into an overall, encompassing disclosure, is over and done. Behind us now are the many analyses, heat maps, comment periods, public outreach, focus groups, committee reviews, Interagency evaluations, extensive consumer and industry research, association position papers, quantitative studies, speeches, public relations, announcements, and presentations. Before us unfolds on August 1, 2015 a brand new set of disclosures – a combined set, as in new disclosure at the commencement of the loan origination and new disclosure at its closing – the former to be called Loan Estimate and the latter to be called Closing Disclosure.[i]

The new set has been dubbed “RESPA-TILA Integration,” since the consolidation requirements reflect the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directed the Bureau to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5.[ii] For the balance of this article, I will refer to these provisions as the “RESPA-TILA Rule” or (“Rule”). Additionally, I will refer to the consolidated disclosures as “Integrated Disclosures.”

The Rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or chattel-dwelling loans, such as mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The provisions also do not apply to loans made by persons who are not considered “creditors,” where such persons make five or fewer mortgages in a year. However, certain types of loans that are currently subject to TILA but not RESPA are subject to the Rule’s Integrated Disclosure requirements, including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes. So, creditors originating these types of mortgages must continue to use, as applicable, the GFE, TIL, and HUD-1 disclosures required under current law.

There is also a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers. These creditors are exempt from the requirement to provide the RESPA settlement cost booklet, GFE, HUD-1, and application servicing disclosure statement requirements, and, thus, exempt from the requirements to provide a Loan Estimate, Closing Disclosure, and Special Information Booklet for these loans.

The RESPA/TILA Rule

I am sure that the question will be asked whether creditors may use the Integrated Disclosure on loans not covered by the Rule but subject to RESPA and TILA. The short answer is that using the Integrated Disclosures for such purposes is not prohibited on loans that are not covered by RESPA and TILA (i.e., mortgages associated with housing assistance loan programs for low- and moderate-income consumers). A creditor cannot use the new Integrated Disclosure forms instead of the GFE, TIL and HUD-1 forms for transactions that are covered by RESPA and TILA that require those disclosures (i.e., reverse mortgages).

With its usual flair for brevity, the Bureau’s proposal in July 2012 is a mere 1,099 pages.[iii] In November 2013, the final rule was issued, reaching the gargantuan proportions of 1,888 pages.[iv] Some of the seemingly boundless verbiage has thankfully been distilled to a 91 page guide, entitled TILA-RESPA Integrated Disclosure Rule, Small Entity Compliance Guide (“Guide”).[v] The most recent update to the Guide was issued in September 2014. The Guide touches on many features of the Rule and the implementation of the new disclosures; however, a thorough reading of the final rule is needed in order to comprehend the scope, application, and breadth of the Rule in effectuating its provisions. [vi] [vii] [viii]

Much of the Rule can be encapsulated in a single sentence, leaving aside all the details, as set forth by the Bureau:

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.[ix] (Emphases in original)

As in all consumer disclosure regulations, the compliance effective date and the operational recognition of that date are critical timing points. The new Integrated Disclosures must be provided by a creditor or mortgage broker that receives an application from a consumer for a closed-end credit transaction secured by real property on or after August 1, 2015. But creditors will still be required to use the GFE, TIL, and HUD-1 forms for applications received prior to August 1, 2015.

Operationally speaking, as the applications received prior to August 1, 2015 are consummated, withdrawn, or cancelled, the use of the GFE, TIL, and HUD-1 forms will no longer be used for most mortgage loans.[x]

But from a process perspective, this timing can get complicated quickly. Various restrictions take effect on the calendar date August 1, 2015, regardless of whether an application has been received on that date. For instance, take note of these restrictions:

The Strange Case of the Shrinking Mini-Correspondent: A Primer on Forensics

WHITE PAPER

 Jonathan Foxx

President & Managing Director

There is nothing more deceptive than an obvious fact.

The Bascombe Valley Mystery

Sir Arthur Conan Doyle

The predictable sometimes is predicted and sometimes it is not. Our biases tend to lead the way in determining a course of action based on perceived predictability. We find ways to convince ourselves that the obvious is not obvious and the necessary is really not essential. It is said that facts are stubborn things, but they are more like heat-seeking missiles if they bear ill-tidings. So, in finding the means toward a “workaround” or any method of circumventing or overcoming a problem, real or imagined, our hearty species indulges in an endless variety of obfuscations, bafflements, blinding bewilderments, miasmic confusion, discombobulating fogs of frenzy, perplexities of interests and foolish entanglements. All for the sake of avoiding ineluctable facts!

A characteristic feature of a predictable event is that it often becomes inevitable. When that happens, no manner of pleadings or remonstrations will undo the already done! It is not as if we did not know that the predictable could become the inevitable. Our biases simply refused to admit that our present plans will oneday meet their future denouement. And so it is that the strange case of the shrinking mini-correspondent took its course, gradually and inexorably, through the annals of mortgage banking to its current resting place on July 11, 2014, with the bloviatingly long title “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders.” Published by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), the issuance is on its way to all supervised institutions as a Policy Guidance (“Guidance”) relating to the Bureau’s exercise of its authority to supervise and enforce compliance with RESPA and Regulation X and TILA and Regulation Z in certain transactions involving “mini-correspondent lenders”.[i]

The billowing wave of the mini-correspondent began as a trickle, intensified as lenders established “mini-correspondent channels,” and gushed into a modest torrent, its demand rising in prominence on January 10, 2014. For it was on this date that the proximate cause for the new mini-correspondent channel was given its impetus, due to the Final Rule pertaining to the Ability-to-Repay guidelines and the requirements of the Qualified Mortgage rule (“Rule”). Many brokers usually seek to charge fees between 2% and 3% per loan transaction; however, under the foregoing requirements, any excess above 3% in total points and fees virtually guarantees that such loans, originated by brokers, will not be eligible for treatment as a Qualified Mortgage (QM). A consequence of the Final Rule and specifically the 3% cap was to create an incentive for many brokers to morph into a new kind of loan originator, termed the “Mini-Correspondent.”

In September 2013, in anticipation of the Rule’s compliance effective date coming just months away, my colleague, Michael Barone,[ii] and I published a White Paper and article in which we discussed the challenges facing the mini-correspondent channel. The White Paper was entitled “The Mini-Correspondent Channel: Pros and Cons.”[iii] In the article’s penultimate section, titled "Mini-Correspondents and the CFPB," the following observation was made:

“Before concluding please consider these final points.

Has anyone given consideration as to what the CFPB might take as a position when a tremendous amount of mortgage brokers transform themselves into mini-correspondents with the primary purpose of avoiding QM’s 3% points and fees cap? We surely have, and so have many others. The CFPB has not commented on this issue, but you bet they will at some point down the road. 

It is possible that the CFPB will take no issue with mortgage brokers becoming mini-correspondents! After all, this has been done for years, and when done correctly, it has been a valuable intermediary step for a brokerage firm that wishes to transition from broker to lender. 

But would it shock anyone if the CFPB took issue with the mini-correspondent channel and tried to eliminate it to the extent it is used to avoid the 3% points and fees cap? This would not be difficult. The CFPB could modify the exception to loan originators of the entity that makes the credit decision or take any number of other actions to prevent the mini-correspondent channel from growing solely for the benefit of avoiding the 3% cap. For now, we have to wait and see what their position on mini-correspondents will be.”[iv]

We were not soothsayers or prophets. The facts, such as they were, the experience working with applicable mortgage acts and practices, and the regulatory compliance concerns of our clients, gave us a unique purview.

Are we now finding that the mini-correspondent wave is running its course, shrinking in momentum, and undulating to its demise? Let us explore the requirements and implications of the Guidance.[v] Perhaps we will find a way to solve the mystery at the heart of the mini-correspondent surge and derive some insight about its potential fate.

Eliminate all other factors, and the one which remains must be the truth.

The Sign of Four

Sir Arthur Conan Doyle

Due to the Bureau becoming aware of the transitioning of mortgage brokers from their traditional roles to mini-correspondent lender roles, the CFPB has become concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as “mini-correspondent lenders,” they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers. The specific protections that the Bureau cites include provisions in RESPA and its implementing Regulation X,[vi] and TILA and its implementing Regulation Z.[vii] RESPA and TILA were amended by Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).[viii] On the compliance effective date of January 10, 2014, the Final Rule (issued in January 2013) required that Regulations X and Z apply certain requirements and prohibitions to compensation paid to a mortgage broker. 

An outline of applicable provisions, as they concern mortgage brokers and compensation, consist of the following four factors:

1.     Disclosure of mortgage broker compensation. 

Regulation X requires that the lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement.[ix] However, payments received by the lender from an investor as compensation for a bona fide transfer of the loan in the secondary market need not be disclosed.[x]

2.     Inclusion of mortgage broker compensation in “points and fees.” 

Under Regulation Z, compensation paid to a mortgage broker by a consumer or creditor is included in points and fees for purposes of the points-and-fees cap for “qualified mortgages” and for the points-and-fees test for determining whether a mortgage is a “high-cost mortgage” under the Home Ownership and Equity Protection Act (HOEPA).[xi]   But, the interest paid to a creditor is excluded in points and fees. Excluded also are any points and fees compensation a creditor receives from a third party that purchases the loan.[xii]

3.     Restrictions on mortgage broker compensation.

TILA and Regulation Z[xiii] prohibit certain compensation arrangements between creditors and loan originators, including mortgage brokers.[xiv]

Creating a Culture of Compliance

Everywhere we turn, there is compliance, compliance,
and more compliance required across the board.[i]
Donald J. Frommeyer, CRMS
President of NAMB

The ancient Greek philosophers knew the fundamental distinction between theory and practice. For them “theory” (or theoria) differed from “practice” (or praxis) in that the former meant examining things and the latter meant doing things! In other words, theory was a sort of spectators’ sport, while practice was playing the sport itself. Advanced mathematics is somewhat similar: there is pure (or theoretical) mathematics and then there is applied mathematics. Some theories remain theories forever, and others are extrapolated into practice. So, as it happens, some cogent theories simply do not need to have applied applications to be cohesive theories. Practical applications, however, must be experimentally valid all of the time.

The requirements of implementing a theory can be daunting, especially when the consequences of its practical applications are not sufficiently understood. To put a fine point on this observation: what may seem perfectly acceptable in theory can be entirely unacceptable in practice. Thus, some things are possible theoretically and other things are not possible practically. In compliance, I have learned to approach the notion of something being ‘theoretically possible’ with extreme caution!

So, given the challenges of regulations (theories) and compliance requirements (practices), (1) how should a financial institution accomplish evaluations of its loan origination risks and, most importantly, (2) how to go about embedding such assessments into a culture of compliance? In this article, I am going to provide ways and means by which the management of a financial institution will be able to create a culture of compliance that serves as the foundation upon which to manage risk associated with mortgage loan originations. I will provide an extensive set of questions, the answers to which should call forth the ways and means to establish compliance solutions.*

If you have ten thousand regulations,
you destroy all respect for the law.
Winston Churchill

So, how to create a culture of compliance?

Begin at the beginning!

When was the last time that a risk assessment was performed to identify all the loan products, which departments were affected in originating them, and what staff are responsible to effectuate the origination? That is where to begin. Residential mortgage lenders and originators may offer some, or all, of the loan products subject to the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule promulgated by the Consumer Financial Protection Bureau (Bureau). But originating those loan products starts with identifying the loan flow process itself.

Furthermore, any new origination requirements will affect a number of parts of business systems and processes. For instance, a very short list of affected areas are the forms and processes used to communicate internally and externally that are subject to verification requirements; systems and processes used to underwrite loans must be considered; secondary marketing and servicing processes and systems need risk evaluation metrics, especially with respect to ATR provisions related to the refinancing of non-standard loans into a standard loans.

Specifically, are the various integrated processes and procedures set up to identify loans on the transaction systems with their definitional status under such regulations as the ATR and QM rule, which may involve creating new data element(s) within those very processing systems? Likewise, if the loan is a QM, is a formal consideration undertaken to determine levels of liability exposure and liability protection that a loan is receiving as it moves through the origination process?

To insure peace of mind
ignore the rules and regulations.  

George Ade

The American humorist, George Ade, may have found a way to peace of mind by ignoring rules and regulations. Perhaps he intuitively knew something about the stress involved in originating residential mortgage loans! If you have problems with rules and regulations, I suggest you choose another line of work, for happiness will forever elude you.

Consider this: the ATR and QM rule is just one component of the Bureau’s Dodd-Frank Act Title XIV rulemakings! Here are a few other rules that are now the law of the land:

• 2013 HOEPA Rule
• ECOA Valuations Rule
• TILA Higher-Priced Mortgage Loans Appraisal Rule
• Loan Originator Rule
• RESPA and TILA Mortgage Servicing Rules
• TILA Higher-Priced Mortgage Loans Escrow Rule

Some of these rules are directly and indirectly intersected, interlocked, overlapped, interfaced, and cross-tabulated; they are correlated, tabularized and re-tabularized, re-ordered, enumerated and re-enumerated, re-codified, and, generally, comprehensively systematized.[ii] Each of these rules affects one or more aspects of the loan origination process, organizational structure, and risk exposure. So maybe the great American humorist was on to something!

Nevertheless, if we are going to play, we will have to play within the rules. This means not only considering the compliance implications internally but also the interaction between the financial institution and third-parties upon which the institution relies for verifications, credit and other borrower information, disclosures, underwriting software, compliance and quality-control systems and processes, records management. Notwithstanding the foregoing third-parties, also to be considered are software providers, various vendors, and business partners. Training may also be necessary for these service providers and agents!

All the starting-point reviews in the world will lead to little or no action throughout an organization where certain training needs are not being met. Therefore, from the outset, it is critical to consider what training will be necessary for loan officers, secondary marketing, processing, compliance, and quality control personnel. Any staff involved at critical junctures in the loan flow process should receive training, certainly anyone who approves, processes, or monitors credit transactions.

For the remainder of this article, I will outline the key questions that should be asked, the answers to which will determine the extent, depth, and integrity of a culture of compliance. I am going to take you through a set of questions that will form the basis of a self-assessment. This type of internal review should be undertaken in order to set a baseline and determine progress towards compliance with mortgage acts and practices, and certainly the new mortgage rules.[iii] During any such evaluation, keep in mind that this is a due diligence process which is subject to an institution’s size, products offered, risk mitigation, complexity, and overall strength of the existing compliance management system.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*

These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

_____________________________________________________________________________

IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

_____________________________________________________________________________

SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

Social Media Compliance: Frequently Asked Questions

Last month, I discussed some of the salient compliance requirements associated with using Social Media.* Then, a few days later, I offered to you my article, entitled Social Media and Networking Compliance. This month, on March 6th, I was one of three presenters who gave a webinar for American Banker on Social Media, with special reference to the new rules of the Federal Financial Institutions Examination Council (FFIEC). The proposed rule, issued January 23rd, is entitled "Social Media: Consumer Compliance Risk Management Guidance."

My webinar topic: Social Media – Employee Manual. 

The webinar was very well attended by a diverse cross-section of financial institutions. I found it quite interesting that, when polled during the webinar, by a factor of two to one these companies did not have an Employee Manual, even if about a third of them have policies and procedures relating to Social Media.

I have harped on a certain point regarding policy statements, so here it goes again: policies and procedures are a rather abstract concept to employees; employee manuals, however, for certain rules and regulations, are the most effective means to ensure compliance. Training is an important and an ancillary tool, but employees do not always mentally retain training information. Keep this in mind: an employee manual is a constant reminder of a company's expectations and policies.

One aspect of social media that deserves considerable attention is trolling, using anonymity, and general blogging guidelines. Everybody knows that, for the most part, blogging is electronically available to the public. However, with regard to an individual's employment with a financial institution, what restrictions should be placed on an employee who blogs? From my own research and experience, it would seem that many employees actually have no idea of the implications, requirements, and, in some cases, the potential to easily cross over into violations of federal law or state law.

Here are the risks at stake in social media networking and blogging - though by no means less so for forms of advertising through and use of social media: financial risk, regulatory risk, sales risk, reputation risk, legal risk, strategic risk, and operational risk, such as adverse consequences to business plans, projects, Internet Technology and Information Security protections, and many core departmental functions.

In this article, I will offer a high level FAQs about the use of Social Media (SM), with some additional emphasis on blogging. I will also provide bulleted guidelines to give to employees.

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What is Social Media?

SM is a form of interactive online communication in which users can generate and share content through text, images, audio and/or video.

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Do companies use Social Media?

HubSpot found that by November 2012 companies that blog incurred an average of 55% more visitors to their sites than companies that did not blog. Statistically, blogging companies may generate 97% more external website links and 434% more indexed pages, both of which are critical to a company’s search rank. And a global survey by McKinsey of approximately 1,700 corporate executives finds that 69% of respondents claim measurable advantages from social media, including a lower cost of doing business, better access to knowledge, increased marketing effectiveness, insight for developing more innovative products and services, and higher revenues.

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Does SM cover micro-blogging?

SM includes, but is not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

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How do some financial institutions use SM?

SM has been used to receive and respond to complaints, provide loan pricing, and offer generic information about products and services.

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Social Media and Networking Compliance

When you think of advertising, do you include social media? These days, most of you do!

However, social media compliance - which I shall call "SMC" - is a considerable undertaking, far more involved than just issuing a policy and procedure. Often, implementing SMC includes working with internet technology and information security professionals, collaborating with sales, compliance, legal, marketing, and human resources personnel, and ensuring that virtually all employees understand their own obligations with respect to using internet communications.

We have drafted SMC policy statements that call for constant vigilance by management and appointed staff to monitor for and find the appropriate remedies to transgressions relating to use of a company's name, logo, products, and services, in casual and even formal social media interactions.

Recently, Federal Financial Institutions Examination Council (FFIEC) issued a request for comments, entitled Social Media: Consumer Compliance Risk Management Guidance ("Notice"). FFIEC issued this notice on behalf of its six members, Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the CFPB (collectively, the "Agencies"); and the State Liaison Committee (SLC). Succinctly put, whatever the federal agencies eventually adopt, the states will issue the final guidance as a supervisory guidance not only to the institutions that are, by extension, under its supervision but also through the State Liaison Committee, thereby encouraging state regulators to adopt the guidance.

This means that institutions will be expected to use the forthcoming guidance in their efforts to ensure that their policies and procedures provide oversight and controls commensurate with the risks posed by their social media activities. State agencies that adopt the guidance will expect the entities that they regulate to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address the compliance and reputation risks raised by activities conducted via social media.

In this article, I will consider certain features of FFIEC's social media Notice as well as some important subjects to be addressed in constructing an SMC policy and procedure.*

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IN THIS ARTICLE

Defining Social Media

Use of Social Media

Risks of Social Media

Risk Management

Risk Areas

Laws and Regulations

Major Risks

Policy and Procedures

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Defining Social Media

Social media has been defined in a number of ways. For purposes of the proposed guidance, the Agencies consider social media to be a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video.

Social media can take many forms, including, but not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review Websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

A simple test to distinguish social media from other online media in that the social media communication tends to be more interactive.

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Use of Social Media

Financial institutions use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public, and engaging with existing and potential customers.

For instance, social media has been used to receive and respond to complaints. They have been used to provide loan pricing. Since this form of customer interaction tends to be informal and occurs in a less secure environment, it presents some unique challenges to financial institutions.

CFPB’s Regulatory Agenda - 2013

As we begin a new year and prepare ourselves for the blizzard of new and revised regulations coming our way, I think it is important for us to consider the regulatory agenda that the Consumer Financial Protection Bureau (CFPB) has set for itself.* As you've heard me say so many times, preparation is protection. So, please undertake a review of the agenda that the CFPB has promised to pursue in the coming months, especially with the view of how best to prepare for the changes that are sure to follow.

It is worth noting that the CFPB reasonably anticipates having certain regulatory matters under consideration during the period from October 1, 2012 to October 1, 2013. And the CFPB will publish updates to its agenda periodically through October 1, 2013. These matters will be under consideration by the CFPB, primarily including various rulemakings mandated by the Dodd-Frank Act, such as several mortgage-related rulemakings and rulemakings to implement the CFPB's supervisory program for nondepository covered persons by, among other things, defining "larger participants" in certain consumer financial product and service markets.

The CFPB is completing several mortgage-related rulemakings in January 2013, even as it continues to assess the need and resources available for additional rulemakings. For instance, the Dodd-Frank Act mandates rulemakings to implement amendments to the Home Mortgage Disclosure Act, and to the Equal Credit Opportunity Act to create a data reporting regime concerning small, women-owned, or minority-owned business lending. Also, the CFPB has inherited proposed rules concerning mortgage loans, home equity lines of credit, and other topics from other agencies as part of the transfer of authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). All of these regulatory changes will require careful planning and clear guidance with respect to implementation.

In this article, I am going to highlight the regulatory changes that the CFPB has moved into their final stages. I offer a brief outline of the regulatory issues and the CFPB's likely resolution. Each of these regulations, now approaching the status of Final Rule, is extraordinarily significant and, in some instances, constitutes formidable challenges.

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IN THIS ARTICLE

Chart

Consumer Financial Protection Bureau -
Final Rule Stage (Selected Rules)

Final Rule Stages

Loan Originator Compensation (Regulation Z)
Mortgage Servicing (Regulation X, Regulation Z)
Requirements for Escrow Accounts (Regulation Z)
TILA Ability To Repay (Regulation Z)
TILA/RESPA Mortgage Disclosure Integration
(Regulation X, Regulation Z)

Library

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Chart: Consumer Financial Protection Bureau

Final Rule Stage (Selected Rules)

This chart provides a quick overview of certain regulatory changes that the CFPB will promulgate this year. The chart also provides the anticipated Final Rule dates.

CFPB Proposes New Servicing Rules - TILA

On September 26, 2012, we notified you about the proposed rules promulgated by the Bureau of Consumer Financial Protection (Bureau) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation. These proposed rules seek to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing.

Now we would like to provide an outline of the CFPB's proposed companion regulation (Proposal) to amend Regulation Z, which implements the Truth in Lending Act (TILA), such Proposal meant also to implement the Dodd-Frank provisions regarding mortgage loan servicing.

Specifically, the Proposal implements Dodd-Frank sections addressing:

1) Initial rate adjustment notices for adjustable-rate mortgages (ARMs).

2) Periodic statements for residential mortgage loans.

3) Prompt crediting of mortgage payments.

4) Response to requests for payoff amounts.

Furthermore, the Proposal would amend current rules governing the scope, timing, content, and format of current disclosures to consumers occasioned by the interest rate adjustments of their variable-rate transactions.

The Proposal is extensive, nuanced, and comprehensive, covering many aspects of the TILA statute. Therefore, I will touch on some of the salient features of it. You can access our Library to download the Proposal in its entirety.

Comments Due: On or before October 9, 2012.

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IN THIS ARTICLE

Scope

Nine Major Topics

Small Servicers

Library

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Scope

The Proposal generally applies to closed-end mortgage loans, with certain exceptions.

Under the proposed amendments to Regulation X, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded. Under this Proposal to Regulation Z, the periodic statement and ARMs disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.

Additionally, reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.

The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

Nine Major Topics

As is the case of the aforementioned RESPA proposal, this Proposal regarding TILA also contains nine major topics.

1. Periodic billing statements.

Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use. The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The Proposal also includes an exception for small servicers that service 1,000 or fewer mortgage loans and service only mortgage loans that they originated or own.

CFPB Proposes New Servicing Rules - RESPA

Recently, the Bureau of Consumer Financial Protection (Bureau) issued proposed rules (Proposal) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation.

The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing. 

Specifically, this proposal requests comment regarding proposed additions to Regulation X to address seven servicer obligations:

1) Correct errors asserted by mortgage loan borrowers; 

2) Provide information requested by mortgage loan borrowers;

3) Ensure that a reasonable basis exists to obtain force-placed insurance;

4) Establish reasonable information management policies and procedures;

5) Provide information about mortgage loss mitigation options to delinquent borrowers;

6) Provide delinquent borrowers access to servicer personnel with continuity of contact about the borrower's mortgage loan account; and

7) Evaluate borrowers' applications for available loss mitigation options.

The Proposal would modify and streamline certain existing servicing-related provisions of Regulation X. 

For instance, it would revise provisions relating to:

1) A mortgage servicer's obligation to provide disclosures to borrowers in connection with a transfer of mortgage servicing, and

2) A mortgage servicer's obligation to manage escrow accounts (including the obligation to advance funds to an escrow account to maintain insurance coverage and to return amounts in an escrow account to a borrower upon payment in full of a mortgage loan).

The Bureau proposes 'companion' regulations implementing amendments to the Truth In Lending Act (TILA) in Regulation Z (the 2012 TILA Servicing Proposal). We will provide an outline of the 2012 TILA Servicing Proposal in a subsequent newsletter.

Comments Due: On or before October 9, 2012.

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IN THIS ARTICLE

Scope

Nine Major Topics

Small Servicers

Library

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Scope

• The Proposal generally applies to closed-end mortgage loans, with certain exceptions.

• Under the Proposal, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded.

• Under the 2012 TILA Servicing Proposal, the periodic statement and adjustable-rate mortgage (ARM), disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.

• Reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.

• The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

Nine Major Topics

The Proposal covers nine major topics, as follows:
   
1. Periodic billing statements.

Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use.

The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans and service only mortgage loans that they originated or own.
   
2. Adjustable-rate mortgage interest-rate adjustment notices.

Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The Proposal contains model and sample forms that servicers could use.

Disclosure Integration, High Cost, and Counseling

On July 9, 2012, the CFPB issued its proposed integration of RESPA and TILA disclosures into the "integrated" forms, entitled "Loan Estimate" and "Closing Disclosure". These new forms are derived from the Good Faith Estimate (GFE), the Truth-in-Lending (TIL) Disclosure, and the HUD-1/1A Settlement Statement. This assemblage has been duly dubbed with the euphemism "integration".

Excluded from the forthcoming integration are reverse mortgages, home equity lines of credit (HELOCs), chattel dwelling loans, and de minimis originations consisting of loans made by creditors who make five or fewer otherwise covered loans per year.

I have covered the process of constructing these forms in several newsletters and articles, including HERE, and HERE.*

The CFPB is not expecting to finalize the integration before the end of this year. Comments are due November 6, 2012.

However, there is a comment deadline of September 7, 2012 - which will lead to rulemaking before January 2013 - regarding the extent to which the rule applies to loans previously exempted from RESPA or TILA and the further redefining of the term “finance charge” to include most costs associated with residential mortgage loans.

By its own admission, the CFPB has stated that the proposal to "broaden" the definition of a "finance charge" by adopting certain adjustments or accommodations in its HOEPA implementing regulations under Regulation Z, would "cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA."

The CFPB has also set forth proposed rules to implement Dodd-Frank amendments regarding high-cost mortgages and also to provide homeownership counseling provisions that would affect mortgage lending generally (with no exclusion for HELOCs).

The implications of these rules, taken together, are far reaching. I would suggest that you visit our Library for further information.

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IN THIS ARTICLE

“Loan Estimate” and “Closing Disclosure”

Integration

High-Cost Mortgages

Homeownership Counseling

Library

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“Loan Estimate” and “Closing Disclosure”

• The Loan Estimate replaces the GFE and early TIL, while the Closing Disclosure replaces the HUD-1/1A and final TIL.

• HUD's Special Information Booklet will still be required.

• The CFPB's proposal would combine five pages (seven if typical appraisal and servicing disclosures were to be counted) of TILA/RESPA data into a three-page Loan Estimate, not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service.

• The Closing Disclosure is five pages.

Integration

The integration not only provides an entirely new format but also reconciles certain existing differences between Regulation X, the implementing regulation of RESPA and Regulation Z, the implementing regulation of TILA.

Highlights

• Redefines the term “application” by deleting the 7th component from the definition adopted by HUD, as outlined in its New RESPA Rule FAQs, as “any other information deemed necessary by the loan originator.”

• Alters the coverage of the disclosure requirements so they would apply to home loans, except for the aforementioned exemptions.

• Changes the timing and responsibility rules for providing closing disclosures.